Carriers like UPS and FedEx are upping their prices and imposing new restrictions, and it’s only the beginning of a big change for online retailers.
Both companies have introduced a new $24 fee for packages that exceed 50 pounds, reported the Wall Street Journal. This is both a lowering of the previous 70-pound threshold, as well as a raising of the price. And, as the WSJ wrote, this change would likely impact businesses and individuals who rely on these services to send out heavier items.
This change is all part of an ever-evolving shipping war with Amazon at the center. Amazon has been investing heavily into its own first-party delivery networks in an attempt to be less dependent on third parties like the United States Postal Service, UPS and FedEx. Companies, like FedEx, have broken ties with Amazon, realizing that the e-commerce giant is as much a competitor as it is a business reliant on its services. As a result, the shipping businesses operating outside of the Amazon ecosystem are being forced to rejigger their offerings to increase profits and find new logistical areas to dominate. As this war rages on, those who rely on these services — especially smaller e-commerce businesses — are consistently being bombarded with changes.
What’s at the center of it all, said David Marcotte, svp of cross-border retail at Kantar Consulting, is that “starting with small independent [businesses] working your way up to medium, they’re all getting squeezed.” For some retailers that rely on these parcel services, the financial damage begins now. For others, they’ll see the effect in the coming months and years.
In-house versus third-party
The new UPS and FedEx fee hikes are certainly noteworthy, but they are part of an overall trend. Carriers have been looking for new ways to quietly drum up more revenue as they try and rely less on Amazon. The ones feeling the real impact right now, however, aren’t most only businesses. Most rely on third-party logistic networks to handle fulfillment — most of which negotiate their rates directly with the carriers. But, new fees being levied on the consumer now means that prices could very likely increase during the next round of negotiations. Whether or not FedEx and UPS will be stricter in private negotiations down the line remains to be seen.
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According to Zach Schau, the founder of the DTC cookware company Milo, his company has outsourced its fulfillment to a third-party logistics company (3PL) for the last year and a half, and has only experienced one rate increase. With this latest announcement of fee hikes, he’s yet to learn of any impending price changes, but could see some issues down the line. “Either [the 3pls’] businesses are going to be chopped in half, or they are going to keep steady by increasingly everyone’s rates slightly,” he said. “That’s probably something to think about.”
While the prices do seem to be going up — and shipping terms appear to be changing — they may also be indicative of shifting priorities. “I see this rate change as part of multiple changes we’ve seen in the last year,” said Mario Paganini, head of marketing at the shipping software platform Shippo. Both UPS and FedEx have been seeking out partnerships with e-commerce businesses outside of Amazon — including Shopify. “They’ve also made significant investments in their API architecture.” The fee hikes, he reasoned, are “a reaction to them asking ‘alright, what part of the market are we doing well in today? Let’s eke out some more margins.'”
With that, e-commerce retailers face this price hike twofold. If they do shipping in-house, and haven’t pre-negotiated deals, they will deal with these fees head-on. If they offer free shipping, they will likely have to either eat the cost or figure out other ways to offset them. Some retailers, for example, told the Wall Street Journal that they may have to split up orders so that packages don’t hit the weight threshold.
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But if the retailers rely on other businesses to handle logistics and fulfillment, they may see changes down the line. Shipping service providers like Shippo will have to renegotiate their rates with the parcel services, and if prices go up costs will increase. While the impact may not be immediate, it’s almost certain that fees will go up, which will ultimately be paid by the online retailer clients.
An unclear outcome
Things may level out when parcel businesses focus less on Amazon. Paganini believes that more changes are on the horizon, which means that 3PL negotiations will likely lead to some increased prices down the line. “Overall increases are going to be consistent,” he said, estimating a few percentage points per year; “we don’t have any signals that it’s going to blow up to 10%.”
At the same time, he added, the carriers are beginning to realize that their businesses need to rely on the ecosystem that lives outside of the Amazon bubble. “Competing for Amazon’s business is going to be a smaller piece of the pie,” he said. The winners will be “whoever is able to crack the code for up and coming direct-to-consumer brands.”
Still, there’s no indication that things are changes are going to slow down. Amazon is intent on building out its own logistics infrastructure, and isn’t yet focusing on turning a profit. As a result, the others either have to play ball within the Amazon ecosystem or balance things out with new fee structures.
“You have the emergence of a vertical monopoly inside of Amazon,” said Kantar’s Marcotte. “It creates this very stilted artificial environment with competition outside of it.” Without the traditional economics of a business needing to become profitable keeping things in balance, the future is hazy. “I don’t know where that goes,” he said.